Italian banking reform approved

April 2015 | FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

April 2015 Issue

Events in the eurozone have taken a turn for the dramatic in recent months. The stunning electoral victory of anti-austerity party Syriza in Greece and the mass anti-austerity marches in Spain have created a backdrop of financial and economic turmoil in Europe.

However, the spotlight should not be focused solely on Greece and Spain. Italy, too, is coming to terms with a historically underperforming economy and a financial system in desperate need of overhaul. According to data from the IMF, the Italian economy up to the end of 2013 was actually smaller than it was in 2000. For the third largest economy in the eurozone, this is clearly a major cause for concern. With unemployment of around 12.7 percent and a GDP contraction of 0.6 percent expected in 2015 – following a 0.4 percent reduction last year – Italy is facing an uncertain economic future.

The fate of Italy’s banking sector has echoed the country’s wider economic struggles in recent years. Of the 25 banks which failed the European Central Bank’s asset quality review in late 2014, nine were Italian, including the worst performing bank, Monte dei Paschi di Siena. Yet there is still hope that the country’s banking system could be reformed. Indeed, one segment is set to be transformed by a significant program which won approval in late January. Under the terms of this banking reform, which the government passed via an emergency decree, the country’s largest cooperative, or ‘popolari’, banks will be required to change their governance rules and become joint stock-companies.

The changes, proposed and championed by Italian Prime Minister Matteo Renzi, are designed to help improve the governance, transparency and ability of these banks and to support the country’s ailing economy. Ten of Italy’s largest banche popolari will be morphed into joint-stock companies, a transition which is expected to take around 18 months to complete.

Ten of Italy’s largest banche popolari will be morphed into joint-stock companies.

The Bank of Italy has long recommended that the popolari be transformed in this manner, yet the ponderous nature of the Italian legal and financial system has often stood in the way. Historically, many facets of Italian life have been bogged down by seemingly unending levels of bureaucracy. However, as Mr Renzi and his government set about streamlining the country’s internal processes, it would appear that the central bank will finally get its wish.

The Reform Act has been heralded by Mr Renzi and his supporters as a historic and potentially game-changing piece of legislation. Their enthusiasm for the plan may be well founded. Under the existing regime, it was easy for union representatives to quash any potential merger or acquisition. The new regulations introduced by the Act will dismantle the previous system, which gave the bank’s shareholders the ability to vote on transactions and the future direction of the company, irrespective of the size of that shareholder’s stake.

Given the Italian economy’s considerable financial difficulties in recent years, drastic measures have been required to make the country a viable and attractive investment destination. The economy remains in recession, having posted just one quarter of growth in a little under four. Unemployment remains alarmingly high, particularly among the young – Italy has the second highest number of young people either out of work, education or training in Europe. Only Greece can compete with Italy’s tales of financial and economic woe, with the Italians coming second in that particular race to the bottom.

The revolution in the Italian banking system is part of a wider plan to kick the national economy back into gear, and the reforms have been welcomed by most commentators. Shares in the majority of Italy’s banks and financial institutions, including Banca Popolare dell’Emila Romagna, Banco Popolare and Popolare Milan, all rose sharply following the reform announcement. There is a belief within some political circles that the reform program will make acquisition targets out of all of the popolari banks, a move which has angered some on the fringe of the Italian political landscape. Anti-establishment groups such as the Five Star Movement have complained that the reform will be detrimental to the large number of small and medium sized enterprises who bank with popolari institutions.

There are still a number of stumbling blocks for Mr Renzi and his proposals to navigate. The reform program must win parliamentary backing within 60 days of its announcement, and there is likely to be some resistance to the bill both within the government and from external sources. The popolari system is deeply ingrained within Italian society and has close links with the Catholic Church. The church has already registered its opposition to the proposed policy. Some political opponents of Mr Renzi have also suggested that the policy is a mistake. Renato Brunetta, an ally of centre-right leader Silvio Berlusconi, has objected to the reformation of the popolari banks, noting that “the popolari are the only ones that during the crisis increased lending to households and businesses”.